Last month the debate about the role of “purpose” in business and governance took off. Efforts to integrate the concept into boardroom thinking have never been exactly trivial, but April saw a campaign launched to write into law a specific duty for company directors to pursue a company’s purpose.
That campaign, the Better Business Act, included politicians, the UK’s Institute of Directors and high-profile business brands such as John Lewis and Innocent Drinks. Abruptly, the discussion about purpose changed in tone. For some voluntary adoptions is no longer enough; it has to be mandatory.
Among the many debates that circulate the world of corporate governance, purpose may be the most fundamental. It is now included in the UK’s corporate governance code, has become the subject of serious academic research, the cause of pronouncements by some of the world’s biggest companies and goes hand-in-hand with a drive to formulate “stakeholder” governance, itself adopted by the World Economic Forum as a key theme for business in the current age.
When Green MP Caroline Lucas helped launch the Better Business Act campaign to have purpose written into directors’ duties she said it would “transform” the “critical” role of business in confronting the climate emergency.
“The act,” she said, “will help unlock the transformative change we need in a really tangible way.”
And that’s how important some believe purpose is: a means of ensuring business plays a leading part in helping avoid environmental catastrophe.
But, while the Better Business Act may have escalated the purpose campaign to a change in the law, governance reformers are in the meantime left with persuading boards to voluntarily embrace purpose. How is that project going?
Defining company purpose
Before answering that question it’s worth pausing to ask what purpose is. Often, the words “society” and”purpose” appear together offering a sense that a business devoted to purpose has put aside a single-minded focus on profits and shareholder returns to take account of other interests such as communities, workers and suppliers.
Colin Mayer, a professor at Oxford University, has attempted to nail down a less amorphous definition. In a recent study for the British Academy he writes “corporate purpose identifies how the company assists people, organisations, societies and nations to address the challenges they face, while at the same time avoiding or minimising problems companies might cause and making them more resilient in the process.” Or, to put it another way, companies should “find profitable solutions to the problems of people and planet, not to profit from creating problems for either.”
When in 2019 the Business Roundtable—a club for leaders of the biggest US companies—threw its considerable influence and weight behind adopting “purpose driven” objectives it said companies “should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.” Not quite an explicit commitment to avoid harm, as in the Mayer statement, but a serious tack towards stakeholders all the same.
Have companies picked up on these signals? Have they pivoted wholesale to a kinder form of capitalism, or does Milton Friedman’s famous comment that the only “social responsibility” of business is to “increase profits” hold sway over companies?
There is some evidence to examine. Certainly, there are organisations that consider themselves to be “purpose driven” and a number that are often cited by writers as prime examples (Anglian Water, in particular, stands out after the company changed its articles of association to legally embed serving the “public interest” in its constitution).
But there are other observations. When the British Academy published a survey in October last year looking at the attitudes of business leaders towards “purpose”, it found 44% agreed with Mayer’s definition of purpose, but 55% also said business could do with government incentives to change. The results appear to signal that though progress has been made and the objective might be recognised by a not insubstantial segment of the business community, not everyone was on board. Plus, in supporting government incentives, business leaders appeared to indicate that boards need some encouragement to shift their focus.
Other organisations found sticking points too. As noted the UK Corporate Governance of 2018 says boards “should establish a company’s purpose, values and strategy”, but when governance watchdogs looked at what companies have disclosed about purpose the results were less than stellar.
A report from the Financial Reporting Council (FRC) revealed only 21% of the disclosures it examined could be described as “clear about why they specifically existed, their market segment, their USP, and how they will achieve their purpose.” A hefty 22% of statements were “vague”, another 11% simply used a “marketing slogan” or confused purpose with vision, values and operations.
In short, while most companies (86% in fact, according to the FRC) are making an effort to define a purpose, many companies are struggling to make sense of what a purpose statement should be. And even if they include a description of purpose in their annual reports, is it something implemented, living and breathing inside companies?
Making purpose effective
That’s a harder question to answer. Research looks at reporting not at execution. Still, there seems to be a widespread view that we may still be at the beginning of the movement. According to Amin Aboushagor, a policy adviser at the Institute of Directors and formerly a purpose expert with the FRC, many publicly listed companies have a purpose, “but the degrees to which they understand how to make their purpose effective remains to be seen”.
He adds: “Companies are starting to engage with this in a much more positive way and starting to understand the benefits of having purpose and embedding it about their organisations.”
But it’s not easy changing management mindsets, especially since executives have been focused on the same aims—shareholder returns—backed by incentive plans for so long. A new philosophy takes time to gain traction because the techniques have be internalised.
—Robert Hayward, Principia
“The issue,” says Robert Hayward, chief operating officer of Principia, an advisory firm specialising in corporate ethics and culture, “is that it’s actually just hard.
“Embedding purpose requires you to think differently and in a more sophisticated way about every single process that your organisation operates.”
Many managers, he adds, may spend a lot of time crafting the “perfect purpose statement for the website” and realise that may have been time wasted because they “didn’t think about how it actually applied to business decisions”.
The obstacles to change may be generational. Older managers find it more difficult to see anything other financial returns as their guiding star. According to Hayward, they live and work “within the borders of Excel”.
But there are external forces. Managers may hit “the investor wall”. Hayward says that despite moves by many investors to become more enlightened, many have not. “All they want to talk about are the financial returns,” he says
“That’s beginning to change. But to me one of the biggest reasons why we’ve seen slow progress in the ‘belief in purpose’ versus ‘actually progress and embedding purpose’ is that too few people inside and outside companies are asking the hard questions, forcing leaders to take tough decisions and do the actual hard work of embedding.”
Applying an ethics perspective
There may be reason to be optimistic in one aspect of pushing purpose. Hayward believes he detects a change in the underlying argument for change. Until now, most arguments for persuading companies to buy into addressing ESG (environmental, social and governance) is that they improve financial results: boosting one boosts the other, it’s win-win. In the purpose debate, the idea of accepting that is it the right thing to do and the trade-offs that come as part of being first movers are gaining traction.
“If you take the standard ESG lens,” says Hayward, “you’re always going to be caught up in this idea that anything you do has to be a win-win between the sustainability impact and financial success.”
But, he says, starting from an “ethics perspective” and defining principles and purpose, and acting upon them, can lead to a position where managers may be willing to accept the “short-term penalty” of investing in change without instantly seeing a return and being ahead of thinking elsewhere in the system.
“You will talk to leaders who will say there are no such thing as trade-offs, you can always achieve a win-win if you look at the right time horizon,” says Hayward.
“But some people are saying, ‘No, we need to get beyond that. And even if the financial system hasn’t caught up, we need to be having the discussion on the territory of principles, values, moral judgements and the right thing to do, and we’ll let the financial system catch up’.”
One catalyst for this shift in thinking—that executives have begun to see “the right thing to do” doesn’t require a substantive business case or pressure from shareholder for change—is the pandemic.
“To an extent,” Hayward says, “the genie is now out of the bottle because people have realised that businesses can make, and have to make, those kind of moral judgement calls and that this idea we are forced to do something by investor pressure, for example, simply doesn’t hold anymore.”
He adds: “The fault lines of the crisis can be the foundation of change.”
Putting purpose into practice
So, things are changing, regulators have altered their stance, Covid-19 may have changed attitudes in many quarters. But if purpose is to have any bite on a crisis as big climate change, it will need to take hold of the whole system.
Henry Richards, who is working on the Future of the Corporation project at the British Academy, says he believes there is agreement on the definitions and aims of purpose, but executives are still figuring out the complexities of putting purpose into practice. Difficulties in formulating how it works may affect the motivation to fully engage. So how to push things along?
One the one side there are those who do not believe radical change is necessary, while others believe in a more emphatic intervention, hence the Better Business Act campaign. “The thing that differentiates people,” says Richards, “ is not whether they think this is the right way to go but, actually, how to get there.”
—Henry Richards, British Academy
Richards himself offers a warning about seeing purpose as a problem that needs a simple solution.
“You can’t just say, ‘Oh well, the government just needs to change the law and, hey presto, problem solved.’ You can’t just get a bunch of academics to come up with a great measurement systems and say, ‘Hey guys, this will solve your problem’. You need everyone on board.
“Ultimately, you need society on board: there’s no point having a good measurement system if nobody is watching what the outcomes are. If the law is in place you need civil society, unions, the government itself, shareholders to see change applied.”
The system is “complex”, Richards stresses and more understanding is required. Perhaps, most “critical” is “sufficient engagement” from policy makers.
“Actually, what’s needed isn’t one group to come out with a magic solution. It’s a real collaborative effort to work through those technicalities, to provide the leadership. And then for business to take the opportunity that this agenda represents, and really go with it.”
That work is certainly under way. The purpose discussion is happening at many layers and in a number of jurisdictions. Efforts in Europe to reform non-financial reporting and embed sustainability into corporate governance will feed debate about the role of the corporation, as will the mandatory use of TCFD reporting in the UK. In the US the Business Roundtable has already been tested on its “purpose” statements by academics, shareholders and the press.
Meanwhile, the Better Business Act campaign brings out into the open a demand for purpose to be written into law. That has the support of a few politicians across party lines, but while they may be earnest it’s difficult to know whether they will influence the people who currently control legislative decisions. When the Conservative party published its manifesto at the 2019 general election there was little on governance beyond reforming audit. Unlike the other parties, there was little to indicate a desire for fundamental change in governance.
All of that said, at this stage it’s hard to see that the purpose movement might go away. After all, the climate crisis isn’t going away. Perhaps the only real question is how successful it might be and how quickly the word will spread.